Economist: S&P 500 40 Percent Overvalued

The Standard & Poor's 500 Index is heading for a fall because it's 40 percent overvalued.

Banks will probably sell more shares to raise the cash they need and drag down the index, said Andrew Smithers, economist and president of research company Smithers & Co., in an interview with Bloomberg.

"Markets are very vulnerable to an end of quantitative easing," said Smithers.

"Central banks, they've got to stop (buying) some time and if that happens everything will come down."

If the S&P falls 40 percent from its recent 1,079.60, it'll hit 647.76, under its low of last March.

Smithers presciently warned investors off stocks in 2000 at the beginning of a bear market that growled on for two years.

The heavy infusions of cash into credit markets by the Fed, the Bank of England, and other central banks around the world to save the collapsing financial system may soon stop, Smithers points out.

Central bank purchases of debt and troubled assets may have worked short term, Smithers suggests.

But now, as purchases have slowed and may stop altogether, he's raising a red flag.

"Quantitative easing has set off another sharp, and so far containable, asset bubble," he said.

"But if it gets too high and starts to come down then we'll go straight back (into recession)."

Others are more optimistic, among them Bill Miller, manager of the Legg Mason Value Trust, who foresees a long term market rally, with gains piling up over the next 10 years, Barron's reported.

The Standard & Poor's 500 Index is heading for a fall because it's 40 percent overvalued.Banks will probably sell more shares to raise the cash they need and drag down the index, said Andrew Smithers, economist and president of research company Smithers & Co., in an...